New Labour Law in the UAE

The Ministry of Human Resources and Emiratisation (MOHRE) has recently announced that new legislation will replace Federal Law No. 8 of 1980 (Current Labour Law) as of 2 February 2022 (the Effective Date).

While Federal Decree Law number 33 of 2021 (New Labour Law) replaces the Current Labour Law in its entirety many of its terms are familiar and remain the same. It is a mixed bag of changes that may benefit both employees and employers depending on the circumstances. With our employers’ hat on, the cost of dismissals does not appear to have increased (if anything this may decrease) and the introduction of mandatory fixed-term contracts may make it simpler to part ways with employees in circumstances such as poor performance. Employees may welcome the expansion of articles outlawing discrimination but many sectors will lament the changes to the calculation of End of Service Gratuity (EOSG). There is a clear reversal from the current court practice of including an average increment for commission as part of the relevant wage.

We summarise our key insights for employers below.

Anti-discrimination provisions

The Current Labour Law already includes a general prohibition on discrimination, and mandates equal pay for men and women where they are performing the same work; however, these provisions remain untested and the mechanism in respect of wage discrimination has not been confirmed. In terms of discrimination generally there are no specific penalties.

The New Labour Law expands on these protections and prohibits discrimination on the basis of race, colour, sex, religion, national origin, social origin and disability. In addition, employees will be expressly protected from sexual harassment, bullying, verbal, physical or psychological violence by their employer, supervisor or colleagues. An employer is also prohibited from coercing or threatening an employee to undertake work or provide services against their will.

The New Labour Law also confirms that employers may not terminate, or threaten to terminate, a female employee’s employment because she is pregnant or on maternity leave.

No specific or additional remedies have been introduced for discrimination; however, employers may be liable for fines ranging between AED 5,000 and AED 1,000,000 for breaches of the New Labour Law (these are not payable to affected employees).

Three-year limited-term contracts

The most radical change in the New Labour Law is a new requirement for all employees to be engaged through fixed-term contracts which can be up to a maximum of three years in duration. This will be of acute interest to organisations where the use of unlimited- term contracts is the norm. In our experience this covers the bulk of our clients in the region who prefer to take the approach of offering a secure tenure to their employees and to keep turnover at a reasonable level to assist with developing their human capital.

Employers will have one year from the Effective Date to move employees from unlimited-term contracts onto limited- term contracts. In the meantime, employees who were on unlimited-term contracts prior to the Effective Date may be terminated for a “legitimate reason” (please see below), noting the below minimum notice periods introduced by the New Labour Law:

• 30 days if the period of service is less than five years;
• 60 days if the period of service exceeds five years; and
• 90 days if the period of service exceeds ten years.

These notice periods do not apply in respect of limited-term contracts generally, where parties are free to agree a notice period which must be a minimum of 30 days and no more than 90.

As well as notice, an employer may have to pay compensation of up to three months’ wages if the dismissal results in a valid claim to the Court. The fixed penalty of three months’ remuneration, or the balance of the remaining term (if lower), in the Current Labour law for an early termination of a fixed-term contract, the latter of which still applies in many Free Zones, appears to have been abolished and replaced with a more flexible compensation regime. Equally the relatively recent onshore development of fixed indemnities of 1-3 months’ remuneration for early termination of an unlimited term appears to have been abandoned. We discuss the compensation regime further below.

Probationary periods

Probationary periods of up to six months, during which time employment may be terminated for any reason, remain as an option.

The New Labour Law restricts flexibility to a degree and now requires a minimum of 14 days’ notice when terminating an employee on probation, rather than allowing a “same day” termination.

Where an employee resigns from employment while on probation, the required notice is as follows:

• a minimum of one month, where the employee is joining another employer in the UAE (the new employer is obliged to compensate the current employer for the employee’s recruitment costs unless the parties agree otherwise); or
• a minimum of 14 days’ notice where the employee is leaving the UAE. If the employee returns to the UAE within three months, however, any new employer is still required to compensate the previous employer for recruitment costs.

If an employee tries to avoid the penalties for joining a new employer they can be subject to a labour ban of 12 months unless exempted by the MOHRE. In practice, we foresee a degree of difficulty with enforcing the above provisions unless there is a notification regime built in by the MOHRE to assist employers.

It is not clear at present whether recruitment costs are intended to cover the costs of an employee’s visa or work permit. The current position is that these costs rest with the employer and there is an absolute prohibition on claiming these costs back from employees during the hiring process. Our assumption is that on an “unfair” early departure these costs will also fall to the poaching employer.

End of service gratuity

Following the introduction of the DIFC Employee Workplace Savings Scheme in February 2020 (DEWS) , there was discussion that a similar savings scheme may be introduced ‘onshore’ in the UAE. The New Labour Law has not immediately included these changes but makes it clear that alternative contribution-based systems may be introduced by the Cabinet following recommendations by the Labour Minister. The direction of travel towards a funds- based contribution system seems apparent from the foundations being laid in the New Labour Law.

Currently, employees, who resign from employment, have their entitlement to EOSG reduced in accordance with the following:

• where employees are on an unlimited-term contract, they are entitled to one-third of their gratuity entitlement when they resign with more than one year, but fewer than three years, of service; and two thirds where they resign with more than three years’ service but fewer than five years’ service; and
• where employees are on a limited term contract, where they resign prior to achieving five years of service with the employer, no gratuity is payable.

These tapering provisions on resignation are notably absent from the New Labour Law – mirroring the position adopted in the DIFC prior to the introduction of DEWS. As a result, employees will still be entitled to their full EOSG (provided that they have at least one year of service with the employer) where they resign from employment. In the future, in a funds- based system, paying back contributions to the employer based on the reason for termination, from what is essentially a trust for employees, may not be workable or efficient so the change makes practical sense.

Employees terminated summarily for gross misconduct under the New Labour Law will also be entitled to their full EOSG entitlement – a notable change to the existing legislation which takes a fault- based approach to the award of this benefit on termination.

The calculation for EOSG remains the same in terms of the number of days - 21 days for the first 5 years of service and 30 days thereafter, with a two year cap. The ”Basic Wage”, however, has been confirmed as the core component for the calculation of a day’s pay. Under the Current Labour Law, the legislative equation referred to “Remuneration”, but less allowances, which led very logically to rulings by the Courts that increments for variable pay such as commission must also be included as they sit fairly within the definition of Remuneration and are not an allowance or a discretionary form of bonus. Court appointed experts can now be requested to begin to restrict EOSG to basic pay only in line with many employers’ policies which were always open to challenge under the old regime.

This change may cause some concern for commission- earning staff and employers who honor commission earnings within EOSG as a matter of custom and practice. The change may not provide an adequate future security for staff who are engaged with a low basic wage but the capacity to earn a high percentage of their income through commission and other sales incentives. Those staff may now be asked to forego the advantage of a more valuable EOSG benefit on termination. The principle is, in some ways, the same as using a disproportionately high percentage of allowances to reduce entitlement to EOSG which is considered unfair. In our view, Iit should be possible to retain some form of average increment to reflect commission and sales incentives if this is fairer and avoids penalising possibly lower paid sales staff as the law has always allowed an employer to be more generous with benefits than the statutory minimum. Employers who retain a more generous benefit may have an advantage when attracting and retaining the best sales staff in the market. Some employers will want to retain the value of this benefit for employees and others may view this as a saving or confirmation of current policy. Again though, our assumption is that this change is designed to simplify the calculation of regular payments into a funds- based scheme in the future which will make administration easier and avoid disputes. For “piece work” we note that a variable average increment is still mandatory.

There are no longer provisions allowing employees to contract out of receiving EOSG where they are participating in an alternative pension or savings scheme. Many employers have already opted for their employees to use offshore savings schemes and occupational pensions schemes and other local UAE based solutions. There remains, in the New Labour Law, a brief reference to pensions and retirement schemes being provided “without prejudice” in some establishments under other legislation, but clarification is needed as to the status of all contracted-out arrangements while an onshore DEWS- type scheme continues to be discussed within government. Clarification is required that opt-outs remain in force in the interim period. Our expectation is that employers should not be prejudiced for providing, in essence, a scheme which is usually more beneficial or flexible for their employees or at least matches the basic EOSG. Double payments on termination should be avoided for those employers and clearly this could not have been the intention.

Salary and termination payments

The New Labour Law introduces a requirement to pay all final dues to employees within 14 days of the termination date, mirroring the position in the DIFC to a certain extent. Unlike in the DIFC, however, no compensation is payable to the affected employee where an employer fails to comply.

Changes to leave entitlements

Annual leave

Under the Current Labour Law, annual leave entitlement vests over time to an employee and cannot technically be forfeited. Many employers do implement “use it or lose it” provisions in contractual documentation or policies with limited carry-over rights but the status of these has always been open to challenge.

The New Labour Law changes the position significantly. As of the Effective Date, employees can be required to utilise all annual leave in the applicable annual leave year – surely a benefit to well-being ! Employers are now able to have a clear and lawful policy limiting carry-over of leave at their discretion. Ultimately, employees can forfeit their untaken leave balance. The culture of accruing large leave balances and claiming these on termination can now be tackled with confidence by employers. The purpose of holiday as rest rather than as an additional accrued termination benefit has been underlined.

Maternity leave

The New Labour Law will increase maternity leave entitlement from 45 calendar days to 60 calendar days, paid as follows:

• full pay for the first 45 days; and
• half pay for the remaining 15 days.

Maternity pay will not be decreased where a female employee takes maternity leave prior to achieving one year of service with her employer.

Female employees will also be entitled to take maternity leave as outlined above where they miscarry after six months of pregnancy, have a still birth or where the child dies following the birth. Where female employees give birth to a disabled or sick infant, they can take an additional 30 calendar days of maternity leave – which can be further extended by an additional 30 days of unpaid leave.

Under the New Labour Law, nursing breaks have been reduced from 18 to 6 months.

An employee’s entitlement to maternity-related “sick” leave has also been reduced from 100 to 45 (consecutive or intermittent) days.

Compassionate leave

The New Labour Law introduces compassionate leave in accordance with the following:

• five days in the event of the death of an employee’s spouse;
• three days in the event of the death of an employee’s mother, father, son, brother, sister, grandson or grandparent.

Study leave

Ten days’ study leave per year is now available for employees with more than two years of service, to sit examinations. The employee will need to be affiliated, or studying, with an approved UAE education institution.

Post-termination restrictions

The Current Labour Law allows restrictive covenants; however, these must be limited in geographical scope, time, duration and the type of business being restricted. Market practice has been to limit non-competes to periods of six months to a year.

The position is clarified by the New Labour Law, which expressly states that non-competition restrictions may be included in an employment contract and may take effect for no more than two years from an employee’s termination date. The Civil Code provisions nullifying restrictions where the employer terminates the employment relationship unlawfully have been confirmed in the New Labour Law. Therefore, if a dismissal is unlawful, the post-termination restrictions will fall away.

Termination of employment

Termination with notice

All UAE employees will be migrated within a year of the Effective Date to limited-term contracts. The New Labour Law contains helpful provisions permitting employers to end the employment prior to the expiry of the fixed-term, for a “legitimate reason”. (Under The Current Labour Law, and other regulations, limited-term contracts may only be terminated prior to their expiry for an Article 120 summary dismissal reason (e.g. causing a material loss or breach of confidence) failing which a penalty or indemnity is payable (see above)).

The term “legitimate reason” is not expressly defined in the new legislation – much like the current “valid reason” , for which unlimited- term contracts may be terminated under the Current Labour Law. It may be the case that the Labour Courts interpret it as meaning a reason related to an employee’s performance or conduct.

However, the New Labour Law does expressly permit termination for reasons other than those related to an employee’s performance or conduct. The New Labour Law now goes some way to recognising redundancy as a reason for dismissal – with termination permitted where the employer is bankrupt, insolvent, suffering any economic or exceptional reasons, or closing. This falls short, however, of making “fair” a dismissal due to a requirement to reduce numbers within a certain role.

An employer may also terminate the employment relationship where the employee does not meet the necessary conditions enabling the employer to renew their work permit.

Employees are now entitled to one day of unpaid leave per week to look for a new job where the employer terminates the employment contract.

Termination without notice

Although the new “Article 44” may not roll off the tongue in quite the same way as “Article 120” (the current UAE “cause” or “gross misconduct” provision) the circumstances constituting a fair summary dismissal remain virtually unchanged. There are, however, a couple of useful new grounds for employers, notably where an employee:

• abuses their position for profit or personal gain; or
• commences work for another employer without complying with the applicable rules and procedures.

The provision for dismissal for “assault” has been extended to cover all forms of verbal and physical abuse in line with the protection of employees from bullying and harassment.

Unlawful termination

There is no longer a concept of “arbitrary dismissal” under the New Labour Law. What has been removed is the concept of a dismissal linked to “the work”. This accommodates the changes introduced by Article 44 for economic or restructuring based dismissals.

Termination will now simply be unlawful where it is a result of:

• the employee filing a serious complaint against the employer; or
• the employee filing a successful claim against the employer.

Compensation for unlawful termination remains capped at three months’ total salary, in addition to all contractual and statutory entitlements. The New Labour Law does make it clear that compensation will be determined with reference to an employee’s length of service, type of work performed and the amount of damage sustained by the employee. So, where an employee has been engaged for a short period only, and finds a new role relatively quickly, damages for early termination of a fixed- term contract should arguably be capped by courts at 1 one month, plus the relevant notice period. The tendency for courts to award the full three months in many cases can be open to challenge and this may assist with negotiating cheaper settlements with departing employees.

Flexible working

Finally, a topic of great interest since the start of the COVID-19 pandemic has been flexible working. The New Labour Law sees several arrangements expressly recognised, namely:

Part-time work

Although onshore employers may utilise part-time contracts, the Current Labour Law does not provide for the pro-rating of benefits where employees work part-time. The New Labour Law recognizes part-time employees and states that they are to be entitled to annual leave on a pro-rated basis.

It remains to be seen whether the legislation will allow for the pro-rating of other benefits where an employee works less than full-time. At the time of writing, the Executive Regulations accompanying the New Labour Law have not been issued.

Remote working

Although there are no specific guidelines regarding home-working, the New Labour Law does set permit an employee to work remotely with the approval of the employer. The legislation does not describe any additional obligations on the employer. We recommend continuing to issue letters which describe obligations around ensuring health and safety and which include practical rules relating to the provision and care of equipment.

Next steps

The New Labour Law will apply to all UAE private-sector employers, with the exception of those located in the DIFC or ADGM Free Zones. It is important that all affected employers ensure that they are compliant in advance of the Effective Date.

Please reach out to us if you require more information on the New Labour Law. We will be issuing more support to clients in the coming weeks in the form of training and other materials. There are changes that do require careful thought by senior leadership teams but there is time to plan and most importantly communicate with employees to avoid uncertainty.

We are already assisting clients with the following:

• updating employment policies;
• amending template employment contracts, and existing contracts where necessary; and
• general queries on the New Labour Law.